Ok, that’s the last Ernest joke, I promise. Most of you probably don’t even know who that is anyway.
Another term that most people don’t run into outside of a real estate transaction is “earnest money.” However, there is a term that many are familiar with and is somewhat similar: security deposit.
Thinking of earnest money as a security deposit is fairly accurate. Like a security deposit, earnest money in a real estate transaction communicates the seriousness of the person paying it. It also has the potential to become liquidated damages to a seller if a buyer breaks the contract for reasons other than the agreed contingencies in the sale agreement.
The earnest money deposit is typically paid within three business days of mutual acceptance of an offer on a property. It is paid directly to the title and escrow company agreed upon by the buyer and seller, and it is held in escrow until closing, when it becomes part of the buyer’s final down payment and closing costs.
In Oregon’s typical real estate contracts, there are two standard contingencies that usually allow a buyer to receive their earnest money back and terminate a contract: the inspection contingency and the financing contingency. In most other cases, if a buyer simply gets cold feet or finds another property they would rather pursue, the earnest money deposit is relinquished to the seller as liquidated damages for breaking the contract. A closer look at contract contingencies can be found in another blog post.
Typically, around 1% of the purchase price is a good estimate for earnest money. However, in a competitive, multiple-offer scenario, a higher amount can be strategic. In the end, there is no set amount required, and it’s important to remember that it will be withdrawn from the buyer’s account and held in escrow, so budget accordingly.
More questions about earnest money? Contact us!
